By Lawrence G. McMillan
The market, as measured by $SPX, continues to fall at a rapid rate. It has broken down below the lower end of the trading range that had existed since last November. It also broke through a support line at 5670 (higher horizontal red line on the $SPX chart in Figure 1). The next support area is likely to be near 5400, which was last September’s lows.
Having said that, though, this market is extremely oversold and could stage a sharp, but short-lived rally at almost any time. Oversold rallies typically reach the declining 20-day moving average, which is currently just below 5900. Given that $SPX closed at 5521 on March 13th, that’s over 300 points.
We prefer to wait for confirmed buy signals before jumping in front of a bearish trend, though. One has already set up ($VIX “spike peak” buy signal) and more will follow if there is some stabilization.
Equity-only put-call ratios are racing upwards now, since put buying has been very heavy this week. Both remain on sell signals for the stock market since they are rising. The weighted ratio (Figure 3) has reached the heights of last summer, but it is not the level of the ratio that is important, it’s its direction and that is still upward. These put-call ratios won’t generate buy signals until theyroll over and being to trend lower.
Breadth continues to be miserable and both breadth oscillators remain on sell signals, although both are in extremely negative (oversold) territory. It will take at least two, and perhaps three days of positive breadth for them to roll over to buy signals though.
Implied volatility ($VIX) finally responded to the stock market’s bearishness, although it did not go into an explosive rise. But it is trending higher, so the trend of $VIX sell signal (for stocks) remains in place. $VIX rose just above 29 this week, which stopped out the previous “spike peak” buy signal, but generated a new one as of the close of trading of March 12th.
In summary, we have only one buy signal confirmed, but we expect to see more in the next few days. The ensuing rally is likely to carry upwards to about 5900 and then run into more trouble. We have been rolling deeply in-the-money puts down, and will continue to do so where appropriate.
